Comparables: The Building Blocks Of An Appraisal
Appraisers throw around the word “comparable” all the time but how often have you had one sit down with you and explain to you what a true comparable is? Comparables are more than just sales as I pointed out in a past blog post, they are the building blocks of an appraisal and what an appraiser uses and depends on to come up with value. Lets take a look at exactly what a comparable is so that when you read an appraisal you will have a better understanding of why the appraiser used the sales that they did. If you are a real estate agent it can help you more closely replicate what an appraiser does to help you in pricing your listings. So let me help answer the million dollar question: What is a comparable?
A Comparable Is…
Located in a similar competitive market area- I quit saying that a comparable had to be located in the same neighborhood or subdivision because there’s more to it than that. While this may be the best case scenario it is not a deal killer if it is not. A sale within the same neighborhood/subdivision will reflect similar locational characteristics, however it is possible that there can be other areas that have similar influences and be good indicators of value. I prefer to look within the subject’s neighborhood first but if there have not been any sales then I will look to other areas that are in the same school system, access to work areas, and similar type homes. You want to ask yourself: If there were no homes for sale in my subject neighbor what other neighborhood would my buyers look at that have similar price, age, and style of homes.
Similar in physical characteristics- Comparables should be similar in physical characteristics to the subject. This includes gross living area (square footage), bedroom and bath count, floor plan, and age. Having a sale with an identical floor plan may not be possible, however finding
those that have similar utility should be the goal. An example I would like to share is that of comparing a home with a basement to one without. These two types of homes have different utility, including square footage and room count, and would not be considered comparable.
Slight variations are acceptable, however the more adjustments you make for differences the less “comparable” a property becomes. The best method for choosing comparable sales involves what is called bracketing, which I wrote about in a previous post. Bracketing involves choosing comparables that may be superior, equal to, and inferior to the subject property in the various physical characteristics. The idea is that the superior property will be adjusted downward, the inferior property adjusted upward and the similar property will have little or no adjustments, and the final range of value will provide a relatively tight range of value from which to reconcile a final value estimate.
Have occurred recently- By using sales that have occurred recently you will be using comparables that reflect what is occurring in the real estate market now and not 6-12 months ago. Economies change, including the real estate market, and things that influenced value 12 months ago my not matter now. By using the most recent sales, adjustments for the differences related to time will not be necessary. An older sale may require adjustments if the market has changed significantly since it occurred, however in slower markets this may not be necessary.
Compete with the subject property- A property that competes with another is one that a buyer would consider purchasing if the first one were not available. Does it have similar bedroom and bath count? Is it in a similar price range? Does it have similar features such as a swimming pool, or amount of land? Is it in a similar school system or municipality? How about the its condition, does it need fixing up or has it had major renovations? These are all things that should be taken into consideration when choosing comparables for an appraisal.
So, what are your thoughts on comparables? Did you learn something about comparables that you didn’t know already? I’d like to hear your thoughts so leave me a message below and I’ll be sure to respond.
If you liked this post subscribe by email (or RSS feed). Thanks for visiting.
This is an important conversation, Tom. It’s easy to use “sales” and “comparables” as synonyms, but they’re not necessarily the same. Just as you said, “A property that competes with another is one that a buyer would consider purchasing if the first one were not available.” Sometimes I have real estate agents hand me a stack of “comps”, but they are really only sales that happen to have closed at the top of the market (or they help “meet the value”). These sales might be significantly different in size, location, or level of upgrades, etc… and ultimately a buyer shopping for a house like the subject property would not consider purchasing the “comps” at the same time.
So true Ryan. As I have said before, one of my goals is to educate agents on what a comparable really is so that they can use the best comps in their CMA’s.